China Online Lending Shakeup Looms as Tiger Global Enters

Bloomberg News

January 22, 2015, 11:00 AM EST

China’s booming online lending industry will have more failures as it matures beyond a fad, said Soul Htite, whose venture in the nation just sold a stake to Tiger Global Management, the U.S. investment firm run by Chase Coleman.

A rush by Internet firms into financial services is a repeat of the mimicry that saw Chinese ventures rise and fall after styling themselves on U.S. discount company Groupon Inc., Htite, 41, said in an interview in Shanghai this week.

Htite, an American who grew up in Montreal, was a co-founder of the world’s largest online loan broker, LendingClub Corp., in the U.S. He’s now chief executive of peer-to-peer lender Dianrong.com, which says it has brokered more than 1 billion yuan ($160 million) of loans since starting in Shanghai in 2012.

“When I came to China, everybody had a group-buying company because at that time Groupon was the company that everybody wanted to mimic,” Htite said. “Now they say: We are going to do financial services. No, you can’t. You can’t convert an Internet customer that gives you his social type of information into a financial services customer.”

Dianrong.com said last week that it sold an unspecified stake to Tiger Global Hong Kong Ltd., a unit of the $15 billion investment firm founded and run by Coleman. Hong Kong’s Sun Hung Kai & Co. invested last year.

Risk Management

Most internet finance companies are “not well versed” in risk management as many of their staff are from technical backgrounds, central bank Deputy Governor Pan Gongsheng said in November. At Dianrong.com, about 45 percent of the staff come from banks, according to Htite, who cited a default ratio of 3.5 percent for personal loans and 0.58 percent for credit extended to small businesses. That compares with commercial banks’ 1.16 percent level for non-performing loans of all types.

The value of China’s peer-to-peer lending transactions surged almost 13-fold since 2012 to $41 billion last year, according to Yingcan Group, which tracks the data. Of more than 1,500 lending plaforms, 275 went bankrupt or had difficulty repaying money in 2014, up from 76 a year earlier, Yingcan said.

Internet sites match investors with individuals and small businesses seeking loans. In the U.S., LendingClub was the nation's first peer-peer lender to list.

Tencent, Alibaba

China’s financial innovation includes ventures by Internet company Tencent Holdings Ltd. and by an affiliate of online giant Alibaba Group Holding Ltd. In total, 24 peer-to-peer firms had received 3 billion yuan of financing from venture capital companies including SoftBank Corp., Sequoia Capital and Xiaomi Corp. as of September, according to Zero2IPO Group, which tracks the data.

Dianrong.com, which has about 1,100 employees, built an Internet financing business for Bank of Suzhou, a lender in Jiangsu province, and takes a cut of the profits from that operation, according to Htite. For credit brokered through Dianrong.com, borrowers pay an average 13.75 percent interest, while lenders get an average 10 percent, he said.

Chinese officials are considering what rules are needed for the industry amid some signs of turbulence. Some online platforms have pooled individuals’ money and put it into investment products. In one case, a platform controlled by Beijing-based Internet company Sohu.com Inc. has pledged to bail out if necessary investors in a wealth-management product linked to troubled property developer Kaisa Group Holdings Ltd.

“I’m for everything that pushes people for transparency,” said Htite. “But you really have to be careful when you regulate. If you make it difficult for people to do business then you are killing innovation.”

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